Diving into the Legal Issues of NFTs in FoodTech

The Non-Fungible Tokens (NFTs) market is booming at the moment — as of April 12, 2021, the revenue generated from NFT sales in March 2021 was close to $64 million. This value amounted to roughly $336.6 million (more than five times its value in April), as of October 15, 2021.

The continued growth of minting and selling digital artworks as NFTs has promising results. It is already pretty clear that NFTs have a role to play in shaping the future of FoodTech. But exactly how this will evolve in the next few years in the light of a whole range of new obstacles remains to be seen.

Implementing NFT in FoodTech

A long list of large regional and international brands have given their nod of approval to NFTs, at least partly by participation. Food brands like Coca-Cola, Taco Bell, Pizza Hut, and Pringles have already launched their collections of NFTs. Pringles announced the release of CryptoCrisp, a brand new limited-edition flavor at the peak of NFT mania. Pizza Hut Canada’s latest addition, a pixelated pizza, is an NFT collectible available on Rarible for $0.18. All these new efforts intend to complement our very fungible tokens for their nonfungibles. However, there are some legal restrictions on the way such as the FoodTech industry having to pay a potentially very high price for creativity and copyright. It is worth discussing some of the more prominent legal issues faced while implementing NFT in FoodTech to understand them better.

The Technical Side

The NFT field involves different objects such as the token itself, the picture, and the rights to it. The value for a buyer is limited to their rights to the picture and the real possibility of their assignment, i.e., resale. But when you sell an NFT, a digital tag of a specific picture, it transfers the rights to the picture itself. That is what people believe, which is far from reality.

The NFT issue per se can lead to an exclusively technical connection with the picture. For instance, a hash of the picture can be stitched into its smart contract, in which a legal connection does not arise automatically. It means that one can buy the token but not the rights to the picture.

Hence, to ensure that the purchased art object does not turn into a pumpkin when you sell it, you need to solve two main problems while releasing the NFT:

1. Make the issued NFT a transferable object.

2. Determine the rights belonging to the buyer and the picture as an object of intellectual property. Also, legally link the copy of the picture to the NFT.

Copyright

People often are under the impression that whenever they buy an NFT, they purchase the digital work itself. But that is not true. They are merely purchasing a collection of code called metadata that links to the work’s ‘true’ version. It is written into the blockchain and carries information about the location of the original work and its owner. It does not prevent people from downloading and viewing digital artwork.

There can be more complex issues if someone creates and sells an NFT of existing work, especially if they do not have copyright or ownership rights. As per copyright law, no one can stop anyone from copying the job, given that the copyright has expired and the work now falls into the public domain.

● Data Hosting and Information Protection

You should save NFTs on a blockchain since it helps specify its current location. Digital assets representing NFTs are stored in a different location. You will have access to more detailed information in an NFT, usually connected to an asset via a link.

But if the asset somehow gets erased, the NFT will become useless. An NFT will not be related to the specific digital asset if the link breaks. You cannot even perform a backup for the same NFT. Every NFT is original and, hence, replacing them is impossible. Such a buyer’s risk that stays without recourse can lead to data storing violations, interruptions, and loss of vital information.

● Data Protection Regulations

In the EU, for every private info point, there is at least one legal individual against whom data subjects can enforce their rights (as per GDPR), such as rectifying or eliminating personal information. The USA has a similar law, which states that users sometimes can completely delete their private information. The same is granted by some data protection laws like California Consumer Privacy Act or the EU GDPR provisions.

However, these rules might not be valid when using a blockchain since they do not allow users to disclose their identities. It makes exercising their rights almost impossible for data subjects. It means that NFTs with private data might not go in favor of data protection principles.

● Taxation Aspects

NFTs are mostly taxed. If you did not make money by selling an NFT, you should consider reporting the proceeds as income on a tax return, so the same laws that are valid for fungible crypto work for Non-Fungible Assets, too. But if you invest in them, any revenues generated from their sale will be taxed as property and subject to the capital profit tax. You may face such activities as:

➢ Buying an asset with fungible crypto, which is a disposal of the crypto and incurs a capital gain or loss;

➢ Offering an NFT for crypto, in which a seller incurs a capital gain or loss;

➢ Trading one piece of art for another, which triggers some taxes as well.

● Estate and Sequence Planning

Estate planning comes into play if you want to ensure that your heirs obtain ownership of your digital works if something goes wrong. That is why smart planning is crucial for strategically including NFTs in a personal Estate Plan.

Know Your Customer (KYC)

Procedure NFTs are still in their infancy. Consequently, no site holding auctions for the sale of NFTs has KYC. Such blind sales can get you in trouble with international and US structures since they counteract the laundering of criminal funds.

The KYC procedure is used on platforms that trade cryptocurrency, and it is a requirement of international legislation for combating money laundering. In the absence of the KYC procedure, processing the applications for tokens and sorting them out can take several weeks.

A Legitimate Right to the Object

If the law in the relevant jurisdiction is not evolved to legally recognize an NFT as a legitimate object for sale and purchase in the same way it does with physical and/or other digital items, then trading becomes an issue. In this case, buying an NFT is more like buying a plot on the Moon. Indeed, there will be a contract; there will be a plot on the Moon but zero value in hand.

In most countries, the status of NFTs is still not clear. However, in some countries, NFTs are a legitimate object of sale, but they have some serious restrictions on their release and circulation. For instance, the USA recognizes most NFTs as securities and requires strict regulatory procedures for their issuance.

At the same time, the position of the US Securities and Exchange Commission (SEC) regarding NFTs and other tokens is still unclear, which brings with it a risk of them getting recognized as a type of securities retrospectively. In addition to this, you may have to take on a risk of penalties for noncompliance with procedures once your token has been sold.

Conclusion

FoodTech is undoubtedly pushing boundaries, and rightly so. It is going much beyond the functional aspect of delivering products and services to provide the ultimate experience. There is still room for improvement in this space, and the technical side, legal issues, importance of the KYC procedure are only some of the early obstacles to be considered. Much like at the very start of crypto mania several years ago, NFTs will see their ups and downs, but if the consumer response and early-adopter pull are consistently strong for a considerable amount of time, the NFT space will find its universally accepted balance and have a chance to play a rather excising role in furthering the tech efforts across most industries.

For now, to make the most out of NFTs in FoodTech, companies must continue the trial-and-error approach to help overcome and evolve the roadblocks as well as any legal issues that stand in the way of implementing NFTs within the industry.

Also published on: https://medium.com/foodtech-industry/the-rise-of-nft-in-foodtech-legal-issues-8bf3ea3b9014